The Sri Lankan economy is expected to move along a faster recovery path, despite the latest surge in COVID-19 cases locally that could hamper near term growth prospects.

The release of GDP estimates for the second quarter of 2020 by the Department of Census and Statistics (DCS) has been delayed. It is likely that the second quarter of 2020 has recorded a greater contraction than in the first quarter, followed by a recovery in the third quarter of the year.

However, as per the DCS, the unemployment rate, which was estimated at 5.7% in the first quarter of 2020, has declined to 5.4% in the second quarter.

The level of employment has also remained broadly unchanged in the second quarter compared to the large decline reported for the first quarter. These suggest that economic activity has remained without much deterioration in the second quarter.

Other developments observed in leading indicators and high frequency data since the relaxation of the countrywide lockdown measures suggest that Sri Lanka is on a path towards economic revival.

The unexpected COVID-19 cluster that has emerged recently could somewhat affect this momentum in the near term, but the expeditious measures that are being taken by the government to contain the spread could limit this impact.

The Monetary Board of the Central Bank of Sri Lanka, at its meeting held on 21 October 2020, decided to maintain the same interest rates of the previous month.  

The Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank will remain at their current levels of 4.50% and 5.50%, respectively, thereby continuing the prevailing accommodative monetary policy stance.

The Board noted the overall market lending rates have been declined following the unprecedented monetary easing measures taken by the Central Bank thus far during the year.

It expects the broad based downward adjustment in market lending rates to continue, thereby ensuring affordable credit flows to productive sectors of the economy in the prevailing low inflation environment.

However, the recent surge in COVID-19 cases globally has prompted several countries to reimpose lockdowns, which may dampen global growth prospects.

Against this background, most central banks across the globe are expected to continue their accommodative monetary policy stance in the foreseeable future.

External sector remains resilient with improved liquidity in the foreign exchange market.

Better than expected outcomes in the external sector, as reflected by the incoming data, are indicative of the resilience of the external sector amidst growing worldwide uncertainties triggered by the outbreak of COVID-19.

Alongside the improvement in earnings from merchandise exports, restrictions imposed on the importation of non-essential goods and low crude oil prices helped narrow the trade deficit substantially during the nine months ending September 2020.